Investors weren't very happy with what they heard from Walt Disney (DIS +1.34%) when it reported its quarterly earnings report for the period ended April 1, 2023. The focus was on a disappointing decline in paid Disney+ streaming subscriptions.
The number of paid subscribers declined by 2% since the start of 2023. Investors panicked since they have been monitoring and waiting to see when the company might turn that segment into a profitable contributor to the diversified company's business. The result was a drop in the stock that brought Disney shares to one of the lowest levels in the past five years.
NYSE: DIS
Key Data Points
Iger is setting out new priorities
As Disney accelerated the rollout of Disney+ during the pandemic, then-CEO Bob Chapek expressed confidence that the direct-to-consumer (DTC) service would far outpace ESPN+ and Hulu by attracting between 230 million and 260 million paid Disney+ subscribers globally by the end of fiscal 2024. Chapek also said that Disney+ would reach profitability by that time, which is now about 18 months away.
Chapek has since been replaced with prior CEO Bob Iger who shifted the plan somewhat. Iger is putting the focus on raising prices and the path to profitability rather than prioritizing the number of subscribers.
The decline in Disney+ subscribers in this second quarter of fiscal 2023 now brings the subscription level to below 160 million, and investors are now questioning whether Iger's strategy will succeed. But what some may not be considering is where the company lost Disney+ subscribers.
Disney lost its bid to retain the streaming portion of rights to India's Premier League cricket last year. Disney's India streaming business, Disney+ Hotstar, represented the vast majority of lost subscribers in the quarterly period. So it remains to be seen whether Iger's plan to attain profitability for the overall DTC segment really experienced a setback or not.
Disney's parks business continues to thrive
With all the focus on Disney+ and its path to profitability, it seems investors knocked down the stock without considering the strength in the overall business. Disney remains a very diversified media company. Overall revenue grew 8% year over year in the quarter as well as for the past six months.
The parks segment includes more than just the theme parks and continues to experience a strong rebound from pandemic impacts. In the quarterly conference call for investors, Iger noted, "At domestic parks and experiences, operating income increased 10% versus the prior year, driven primarily by the continued post-pandemic recovery of our cruise line."
The recent quarterly period did break a string of four straight quarters in which revenue from the parks segment sequentially improved. But even with the quarter-over-quarter drop, revenue jumped 17% compared to the prior-year period.
Data source: Walt Disney. Chart by author.
The company's strategy going forward
Iger didn't hide what the company's strategy will be to make the DTC business profitable. He told investors, "We clearly would like to drive more [subscribers] to the ad-supported service ... because digital advertising is so attractive to advertisers that there's an opportunity for us to really lean in."
Of course, investing in Disney means one has to think Iger will be right and the strategy will pay off. With the stock down by about 15% over the past three months, believers may find now is a good time to buy.
While waiting for the DTC strategy to pay off, parks and cruises are going well. And while many have criticized recent box office offerings, the just-released Guardians of the Galaxy Vol. 3 has had an impressive showing in its first two weeks. The Disney magic just may not be dead yet.
